Stock rally fades amid soaring inflation and dampened consumer confidence

The S&P 500 closed above an unprecedented milestone Monday (4,701.70), after the House passed a historic $1-trillion bipartisan infrastructure package in the night of Friday, November 5. Yet, traders rapidly turned more cautious as mid-week trading approached. Inflation data indeed showed consumer prices had risen at their fastest pace since November 1990, lifting the year-on-year increase to 6.2% last month. It means that real interest rates are now at historically low levels (-4.6% applied to the U.S. 10-year Treasury Note). Inflation pressures may explain why the University of Michigan Consumer Sentiment Index tumbled from 71.7 to 66.8 in the preliminary November survey. This is the lowest level in 10 years. The survey stresses that one in four consumers are reducing their living standards due to price increases. The specter of inflation is becoming a serious challenge for President Biden.

Against this backdrop, the S&P 500 snapped its five-week winning streak (down 0.31% week-over-week). The Dow Jones Industrial Average lost 0.63%, or 228 points, the Nasdaq slipped 0.69%.

By contrast, European markets managed to remain in positive territory. The CAC 40 rose 0.72% over the week, the DAX gained 0.25%, the EuroStoxx 50 edged up 0.17%. The FTSE 100 ended up 0.60%. APAC markets closed mixed. The Shanghai Composite bounced back (+1.36%) after losing 2.8% over the last four weeks. President Xi Jinping will hold a virtual meeting with President Biden on Monday evening. They will try and reset strained bilateral ties. In Japan, the Nikkei treaded water (-0.01%) after the euphoria of Kishida’s victory in the general election at the end of October.

Materials boosted by the $1 trillion infrastructure bill 

Five of the 11 major S&P 500 sector indexes finished in positive territory, led by economy-focused materials (+2.51%), pushed higher by Freeport-McMoran (+11.31%) and CF Industries (+9.07%). Healthcare was the second-best performer (+0.61%), underpinned by Pfizer (+2.30%) and Johnson & Johnson (+0.97%). The largest healthcare company in the world planned to break up into two companies focused on its consumer health business and the large pharmaceuticals unit. Industrials (+0.40%), financials (+0.26%) and information technology (+0.16%) also outperformed the broader market.

In contrast, consumer discretionary plunged 3.19%, dragged lower by Tesla (-15.44%) after Elon Musk sold several blocks of shares. It was also a tough week for utilities (-1.11%) and energy (-1.67%), pressured by a slip in oil prices following a rise in weekly crude stockpiles.

U.S. Treasury yields head back up

Treasury yields climbed in the wake of hotter-than-expected inflation. A poor auction of 30-year bonds Wednesday afternoon did not help. Thus, the yield on the U.S. benchmark 10-year T-note jumped 11 basis points, from 1.46% to 1.57%. The trend reversal was less pronounced in Europe with the 10-year Germany bond yield up 2 basis points at -0.26%.

Corporate investment grade bonds lost ground as the rise in yields gained steam in the U.S. (-0.99% compared with -0.16% in Europe). High-yield bonds did better (+0.10% in Europe and -0.38% in the U.S) while emerging debt remained weak (-0.22% in local currencies), with the dollar in ascendancy (dollar index up 0.96%). Elsewhere, gold hit its highest level since mid-June (spot price at $1,864.90/Oz, +2.56% week-over-week) as inflation pressures boosted demand for a hedge.

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